Los Angeles Times
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Monday, May 25, 1998

Q & A
Caltech Prof Offers Insight Into Start-Up Success
By KAREN KAPLAN, Times Staff Writer

The California Institute of Technology in Pasadena is known for turning out top-notch scientists and engineers. But with research budgets shrinking in universities, corporations and government laboratories, graduates are shunning traditional careers and instead are starting high-tech companies to commercialize their work.
     Caltech chemistry professor John Baldeschwieler knows a little something about that. After founding more than half a dozen companies, Baldeschwieler became an unofficial professor of high-tech entrepreneurship. Thanks to a grant from a Caltech alum, that role was formalized in 1997.
     So far, about 220 students have taken Baldeschwieler's course, Engineering 102, or Entrepreneurial Development. The soft-spoken, enthusiastic professor recently talked about what it takes for a technology-minded person to succeed in business.
* * *
     Question: When did you start your first company?
     Answer: Well, my first serious company started in 1981.
* * *
     Q: Was there a not-so-serious company before that?
     A: In the early 1960s, some colleagues and I developed instruments for monitoring the presence of impurities in the lab. It was a very small, low-scale effort. Everyone made a reasonable return for their effort, but it didn't generate the kind of numbers that would make a splash on Wall Street.
* * *
     Q: What company did you start in 1981?
     A: Vestar. At Caltech, we learned how to build tiny spherical membrane shells that were made out of the same material as human cell membranes. Then it occurred to us that this might have some applications in diagnostic and therapeutic medicine.
* * *
     Q: How did you go about turning this into a company?
     A: I went to all of my friends to see if I could get somebody to invest in this. I was very, very naive about how much money it was going to take--I was thinking about $100,000 would do it. The person who became interested offered us $1 million. I could not envision such a huge sum of money, but of course he was absolutely right. Once we got started, with the regulatory hurdles and the clinical trials, the amount of money involved was far larger than any of us had ever even conceived.
     We started Vestar here in Pasadena and it grew from two chairs and a card table to a manufacturing facility in San Dimas. The company merged three or four years ago, and now it's called Nexstar Pharmaceuticals. It has 560 people and is publicly traded on Nasdaq. This is what I call a serious company.
* * *
     Q: How many other companies have you started since then?
     A: At least five or six.
* * *
     Q: How did this class get started?
     A: I was the person that many people would come and talk to about starting new ventures, so I volunteered. It was clear to me that it would be very, very useful to the students to have just a rudimentary notion as to how businesses are structured, how they're run, what an employment contract looks like, what stock options are, what equity is--things like that.
* * *
     Q: How did you decide what to teach?
     A: I thought of everything that happened to me in going through the formation of Vestar, and that turned out to be the syllabus. We have marketing, intellectual property issues, how to form a company, venture capital financing, basic accounting and corporate governance.
* * *
     Q: What are the most popular topics?
     A: By far the most fun was a little role-playing skit with a venture capitalist from Warburg Pincus in New York, an ex-CEO and myself. I pitched them the idea for a company. We went through the agony of the scientist trying to understand what this guy in the suit was going to bring to this besides a lot of cost.
     The next scene was a year and a half later, when we were out of money. The original ideas I had were no longer interesting, but now I had something much better. The investor was prepared to put in more money, but of course he wants a much larger share of the company. Scene 3 was five years later, where we are either going to go kaput or we'll need a substantial infusion of money and then the technical people lose control of the company.
     Very few of the students had seen this before. It was a cultural window that most of them found very enlightening.
* * *
     Q: What kind of homework do you have in this class?
     A: Anyone who wants credit for the course has to write a business plan. My original intent was to send these out for review to outside venture investors, but you know what? When I saw the actual plans, it dawned on me that there was a tremendous amount of creative stuff in them that is valuable intellectual property. So now I execute a confidentiality agreement with each student and review the plans myself. If the students want some help, I give them access to venture capitalists, patent lawyers and things like that.
* * *
     Q: Are there common mistakes that students make?
     A: Oh sure. Typically they are weak in terms of assessing markets. They think they've got such a good technical idea that it's obvious why someone should build it. They are also weak in terms of the financial argument, specifically what is the benefit to the investor and what return can he or she expect.
* * *
     Q: What kind of companies do students propose?
     A: It's everything. There are mechanical gadgets, a lot of Internet-related businesses, some clever software, some chemistry.
* * *
     Q: Is it hard to find a person who is good at science and engineering and good at business?
     A: Possibly. Almost every one of these ventures goes through what I call the "scientist problem." It's a period where the technology innovator--who is essential to getting the thing started--later becomes an obstacle to the business because if he's the usual creative type, he thinks the original problem is no longer interesting and he's got something else that's much better. But if you keep doing the thing that's better, in the end you never have a product.
     Successful ventures always have a mix of talent. The most important thing I hope to give them is a level of appreciation for what the other parts and pieces are so they can find a collaborator and participate in a successful thing. An experienced venture investor will tell you it's all about management, management, management.
* * *
     Q: Have any companies been launched out of the class?
     A: One that's up and running and has received pretty substantial funding is Xencor [a biotech company that is commercializing technology developed at Caltech]. But there are several very polished business plans. If someone elects to create a Southern California- or Pasadena-based venture fund, I think we'd be able to show them between five and 10 serious, doable seed projects.
* * *
     Karen Kaplan can be reached at karen.kaplan@latimes.com.

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